BRRRR Strategy really works! Even in the Bay Area!

BRRRR Strategy really works! Even in the Bay Area!

Ori SklootPro Member
Investor · Berkeley, CA · Member since 2016 · 242 posts · 304 votes

I am every so grateful to BP and all the great people that are part of the BP community. It was after reading extensively about the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) that I was inspired to try it out on my next purchase. I have bought properties before, but I always used my own cash to finance the deal. This time I decided to do it differently.

Below are the details about the process.   Below that are the numbers on the deal.

Deal Process

  1. I found an off-market SFD in Oakland with a motivated seller.  (For those who are going to ask how I found it - it was through the usual marketing efforts that people talk about on BP.)  His tenant had been living in the property for years without paying rent.  Crazy right? 
  2. We negotiated a little bit on the price.  I made an offer, he countered, and we met in the middle.  I sent him a purchase agreement and he signed.  I am a real estate broker so I represented myself.
  3. The tenants were still in the house.  One of my conditions was the tenants would have to be out of the house before close of escrow.  Owner agreed to offer tenants cash for keys in order for them to leave.  They refused and said they would see him in court.
  4. We hired a lawyer for the eviction process, owner paid cost which ended up being around $3k.  Lawyer went through all the filings and the tenant never responded.  In about two months from when the tenants were first served I get a call from the Sheriff saying they are going the next day to evict.  I meet them at the property and the sheriff enters the house.  The tenants have already vacated!  The have left a bunch of junk and took the wall furnace out of the wall, but for the most part the place isn't trashed. 
  5. Now the interesting part with the financing.  The purchase price was $250k.  I asked four friends if they would be interested in lending me money at 10% interest.  Between them I raised $250k for the purchase.  I provided each of them a promissory note and a deed of trust against my primary residence (not the property I bought).  Apparently this is a key element that @Chris Mason explained to me ahead of time (HUGE shout-out to Chris who was my Super-Star mortgage broker and consigliere on this deal..more about his efforts below).  Chris informed me that by securing their loans against my primary property this would count in the lending world as being an "all cash" purchase.  This matters big-time because it then allowed me to do a cash-out refinance.  Read on about that.
  6. We close escrow and the next day I am in there doing clean up and a rehab. I am also a GC and have lots of construction experience so I run all the rehab myself.  Total of the rehab was about $40k (more specifics below).
  7. Once we close I immediately start the process of my cash-out refinance with Chris.  Once Chris has all my docs he is just waiting for me to finish the rehab so he can send out the appraiser.  I finish the rehab and we have the appraiser out at the house two days later.
  8. Two days after that the appraisal comes back at $400k (which is what I expected, but is probably under market value.  I think it would sell for $430-450k)
  9. I immediately put the house up for rent on Craigslist.   After a couple of weeks I rent it out to a great family for $2750/month.
  10. Some more time passes with providing all my docs to underwriting and then the loan closes a month after the appraisal (total loan time was just under 60 days).   I get the loan for $255k which is the purchase price plus closing costs.  My friends all get their principal payments back as a check from the escrow company.
  11. Bottom line - I put about $54k into the renovation from my own pocket, got about $130k in immediate equity, and I'm now cash flowing $800 per month.  From when I closed on the house it took me two months to close on the new loan.   My friends, the investors, are ready to reinvest the moment I have the next deal.  Yes, it works!  even in the Bay Area :)

Numbers on the Deal

  1. House in East Oakland.  Officially a 1200 sqft 2/1.  
  2. Bought for $250,000
  3. Rehab for $63k - $9k rebates = $54k
    1. Clean up and Dump: $2k
    2. All new electrical, lighting and service panel upgrade: $10k
    3. Hardwood floor refinishing and repairs of 120 sq ft.  $4k
    4. Kitchen: new flooring, quartz countertop, all new appliances (bought all the appliances from Craigslist) $5k
    5. Addition of 1/2 bathroom: $5k
    6. Conversion of garage into 3rd bedroom: $5k
    7. Sheetrock work and Painting: $12k
    8. New high efficiency central heating: $6k
    9. New high efficiency tankless water heater: $4k
    10. New Sewer lateral: $4k
    11. Misc carpentry, landscaping and plumbing: $5k
    12. EBMUD rebate for sewer lateral: -$4k
    13. PG&E rebates for efficiency upgrades: -$5k
  4. House is now a 3 bedroom / 1.5 bathroom
  5. Holding cost (10% interest to friends) $5000
  6. Cash out refinance at $255k = $1,950 per month (PITI)
  7. Rent of $2750 per month, so cash flow of $800/month.
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y

Thanks for the shout out @Ori Skloot, much appreciated. :)

Non-owner occupied, $430k value, total of $59k out of pocket including rehab, is a super cool thing to help execute. 

And, not super hard to be cashflow positive on a $430k property that you picked up for $250k. $2750 rent... I think we have here a 1% rule SFR in the Bay Area.

Ori's networking efforts were also huge part of this. I'm guessing he went to his friends with money earning 5% on Wall Street, and offered them to double their ROI at 10%. Now that he paid them off, they can put it right back on Wall Street earning 5%, and it's a private bank he can draw on the future. Wall Street cannot guarantee you that if you put your $70k with it for 2 months it will become $71k (& you'd be lucky if it did that well in 2 months), but Ori just did exactly that, and proved to his network that he's a better place to park your money than Wall Street, to the extent that you are fortunate enough that Ori is in need of funds. So from the POV of his friends, this was a huge win to double their ROI for a couple months. 

For Ori, hard money would have wanted 3 or 4 points upfront ($250k * 4% = $10k in the garbage) even though he is an experienced and licensed GC, so this was a huge win for him too. I did a little blog post about how it might look to pitch this to people with money sitting on Wall Street doing nothing for them.

For people that only have access to $15k or $25k in capital saved up, but want to get into Real Estate in the Bay Area, this model is also an opportunity for them. I'm certain that if any of his private investors had wanted to see the property, the plan, the numbers, etc, he'd have shown it to them, and knowledge is money.

See this reply in the discussion

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  • Investor · West Orange, NJ · Member since 2017 · 7 posts · 1 vote
    9y
    Chris Mason Ori Skloot Chris thanks for the input, definitely appreciate your feedback. Hence my my point in the question to Ori about the renovation cost being the factor. I've spoken to a lender who is willing to finance renovation costs provided you have the the required ARV, contractor etc. So wasn't sure if that was the only hurdle. So it seems it's just the financing for the renovation costs is the factor between the alternatives (BRRR v Conventional) and not that there was/ is something else driving the decision. Otherwise, the end result is the same, just different paths essentially.
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Sedrick Chin:

    Chris Mason
    Ori Skloot

    Chris thanks for the input, definitely appreciate your feedback. Hence my my point in the question to Ori about the renovation cost being the factor. I've spoken to a lender who is willing to finance renovation costs provided you have the the required ARV, contractor etc. So wasn't sure if that was the only hurdle. So it seems it's just the financing for the renovation costs is the factor between the alternatives (BRRR v Conventional) and not that there was/ is something else driving the decision. Otherwise, the end result is the same, just different paths essentially.

    Reno financing is totally doable, but they close a LOT slower. In my market, this is often the biggest pain point of renovation purchase mortgages. Ori wouldn't have gotten that price if he was sitting around waiting for us to underwrite reno paperwork.

  • Investor · West Orange, NJ · Member since 2017 · 7 posts · 1 vote
    9y
    Makes sense. Thanks Chris.
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y
    Originally posted by @Chris Mason:
    Originally posted by @Will Barnard:
    Originally posted by @Ori Skloot:

    @Will Barnard   You are correct.  Filed multiple liens behind my primary and my Heloc.  

    Thanks for your reply sir. Question as I know many of the rookie investors will want to know, your private investors on that deal must be very close to you and most importantly, trust you very, very much as taking a 4th, 5th, 6th, and so on position on a deed of trust can be quite risky for them. That risk partially depends on the equity above and beyond the current first mortgage and HELOC (2nd lien).

    I think it is important to mention that from the lenders standpoint, one needs to be very careful in who they choose to invest with, particularly if they are in 3rd position or even more. From the borrower's standpoint, if you are new to the game, it may be very difficult or even next to impossible to get a lender to agree to be that far down on the lien chain so you will likely need to find a different means to fund it, perhaps with equity partners, a fractionalized note (multiple lenders on one note and deed of trust), seller financing, or a combination of those options.

     Valid points. 

    I would point out that even a 6th position mortgage still has the right to foreclose. Maybe they get something out of it, maybe they don't, but they can still trash the borrower's life. So, while perhaps not a "collateral" scenario, it's still a "hostage" scenario!

     Yes but foreclosing on a six position deed of trust means you still have 5 lenders and their loan amounts in front of you so that could be trouble. My point was, it would take a very special trust to get lenders to agree to be that deep down the food chain and I personally would never do it. So for those newbie investors looking at doing something like this, I would urge them to go with a fractionalized note, partnership arrangement, or other means.

  • Investor · San Mateo, CA · Member since 2016 · 9 posts · 8 votes
    9y

    Hey @Ori Skloot - thanks for sharing and what an awesome story!  

  • Real Estate Agent · Oakland, CA · Member since 2016 · 63 posts · 33 votes
    9y

    Great job and congrats! I'm so curious what company you used for the sewer lateral work. Most bids come in closer to $6000-$8000 if it needs to be replaced to the street. Did EBMUD send out a notice offering a rebate to homes on that street? Rare, but I have heard of a few areas they have stepped into help. 

    P.S. Love the pics:)

  • Sacramento, CA · Member since 2016 · 32 posts · 15 votes
    9y

    Thank you for sharing your successful project, Chris! This is very inspiring to me and I look forward to completing one of these projects one day! =)

  • Investor · Emeryville, CA · Member since 2015 · 12 posts · 0 votes
    9y

    How did you decide to convert the garage and add the half bath, instead of just rehabing with the same rooms or making an even larger addition, or making an in law unit? Were there any permitting issues with Oakland from converting a garage to a living space?

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